The Restrictions of Policy of the United States

Abstract

The objective of this chapter is to probe the specific policy implications of the contributions surveyed in earlier chapters, providing new insights and guidelines. The relation between the budget and current account deficits is essential to an analysis of policy. Thus, the first section below recapitulates specific theoretical and empirical results with emphasis on how fiscal consolidation could reduce the external imbalance of the United States. The second section considers the fundamentals of the US economy that would influence positions by foreigners in dollars. The soundness of these fundamentals is critically important to assess whether adjustment of the CAD will occur through a disorderly correction or a more benign process. The final section considers the practical limitations of US policy and provides some guidelines of sound policy.